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Monday, October 20, 2003

China-India Differences as Seen At the Asia Summit of the World Economic Forum

I attended the Asia Summit held in Singapore on October 13-14 organized by the World Economic Forum. Most participants were from Southeast Asia. A number of national leaders from Southeast and South Asian countries also attended. The conference mostly focused on microeconomic issues ranging from corporate governance to trade integration. Geopolitical issues attracted most attention, I thought, with China and India looming large over this ASEAN-centered conference.

I noted how few participants at the conference were from China compared to India or Southeast Asia. It reflects how differently China is organized, I thought. India has an established English-speaking wealthy class. So does Southeast Asia. Both have long histories of private sector-driven economies and, less appealingly, regulation-driven profits.

China is quite different from either in two respects. Its development model is about cutthroat competition. When one company becomes profitable in a business, thousands follow. Such a model maximizes GDP but may not be the best for profitability. Because it is so difficult to make profits, riches are often achieved using illegitimate means, usually through defrauding banks.

I was on the same panel as the mayor of Wushi in the session on China. What he said tells much about why China is so different from Southeast Asia or India. In his speech, he talked about nothing but the advantages of investing in Wushi and explained how he could help foreign investors. When the gong sounded that his time was up, he carried on for another five minutes extolling the virtues of Wushi.

Wushi is situated 200 kilometers to the northwest of Shanghai with a population of 4.4 million. Its GDP has increased tenfold since 1990 and its per capita income is four times the national average. Its economic success has been driven by trade. Multinational companies have turned it into a major production center for electronics and other consumer goods. The city has achieved so much because its government is 100% focused on economic development.

The ruling elite in China are bureaucrats who are both salesmen and decision-makers. While the system lacks checks and balances, which could pose problems in the long term, it is extremely efficient at fostering economic development. The mayor of Wushi, for example, promotes Wushi as an investment destination and can make decisions that meet any interested investor's demands. The ruling elite in other Asian countries tend to be rich businessmen or politicians from the same class. They have to balance between protecting their profits and encouraging economic growth. This handicap makes them uncompetitive against China.

The Chinese do not realize how competitive they are in the world today. Chinese workers are becoming as productive as those in middle-income countries, yet because there are so many of them, their wages are similar to workers in poor countries. The difference is the reason for the current global attention on the Chinese currency. As long as there are hundreds of millions of people looking for work, the Chinese government will not push up its labor costs artificially through appreciating the currency. This would only cause wage deflation.

There are hundreds of cities like Wushi in China. They are learning from the success of cities on the coast and are going all out to develop infrastructure and attract investment. While China will likely experience high volatility, its competitiveness will keep pulling ahead of others, in my view. The tension between China and other competing economies is thus likely to grow, and will only disappear if the Chinese slow down or others step up the pace. I don't see either as possible.
Source: Morgan Stanley Global Economic Forum
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Claus and Edward's "Baker's Dozen"

Claus Vistesen and Edward Hugh are proud and happy to announce that they are now working as "featured analysts" with a new Boston-based start-up - Emerginvest.

Claus and Edward have used a new, updated, methodology in order to identify a group of 13 emerging economies which we consider are going to outperform both the rest of the emerging economy group and the OECD economies in terms of a number of key performance indicators over the 2008 - 2020 horizon.

Through our association with Emerginvest we hope to develop performance indicators which will confirm both the relevance and validity of the selection procedure adopted.

We would like to point out that we have absolutely no financial connection whatsoever with Emerginvest - although we do heartily endorse what they are trying to do.

In particular we see the move by the investment community towards emerging markets as one of the most effective and direct ways to address those issues of inter-country wealth and income imbalances which have plagued our planet for so long now - namely by getting the money from the rich who have it to the poor who need it.

Sending investment to emerging economies is also a way of addressing the underlying imbalances which exist between the relatively older populations of the developed economies who increasingly need to save, and the relatively younger emerging economies who can benefit from the investment of those savings in their countries. So in a way you can both ensure the future of your own pension and help attack poverty at one and the same time. This type of possibility is normally known in economics as "win-win".

The oldest known source and most probable origin for the expression "baker's dozen" dates to the 13th century in one of the earliest English statutes, instituted during the reign of Henry III (r. 1216-1272), called the Assize of Bread and Ale. Bakers who were found to have shortchanged customers could be liable to severe punishment. To guard against the punishment of losing a hand to an axe, a baker would give 13 for the price of 12, to be certain of not being known as a cheat. Specifically, the practice of baking 13 items for an intended dozen was to prevent "short measure", on the basis that one of the 13 could be lost, eaten, burnt or ruined in some way, leaving the baker with the original dozen.

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About Claus

Claus Vistesen is a 23 year old macroeconomist who is on the point of finishing his MSc in Applied Economics and Finance from the Copenhagen Business School. His primary research interests are international finance and international macroeconomics. Claus is especially interested in how the changing structure of global and national demographics impacts on local macroeconomic performance. Moreover - and as the wonk he ultimately is - he also takes a considerable interest issues and methodologies associated with econometrics, and this is an interest he intends to develop in his postgraduate research.

About Edward

Edward 'the bonobo' is a Catalan macroeconomist and economic demographer of British extraction, now based in Barcelona. By inclination he is a macroeconomist, but his deep-seated obsession with trying to understand the economic impact of contemporary demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

He is currently working on a book with the provisional working title "Population, the Ultimate Non-renewable Resource".